Sector Rotation

For years the market has been more and more correlated. Back during the 2000 Tech crash, commodities were an excellent investment where you could make money as the rest of the market went down, especially tech.

There was sector rotation during the 2003-2007 rally, but once the F_E_D stepped i with liquidity injecting operations (officially in 2008, but picked up in 2009), risk assets have become more and more correlated, every year in fact until the point in which it almost didn't matter what you bought, the market was either risk on or risk off and whatever you bought moved like that.

Since QE3 has been announced I've seen hints of it, but there wasn't enough information to overcomes years of high correlation. I've been noticing more and more recently that sector rotation as well as stock picking (AAPL vs RIMM for instance) has made a comeback although on the stock picking side, I'm not sure if it was for the right reasons or healthy market reasons.

In any case, this week I've really noticed it, first Oil and Energy were in rotation and we made some money long USO/UCO, but closed that trade down, expecting to re-open it on a pullback and I still do, Financials seem to be the next one moving out of rotation and Tech which was the first to move out is moving in to rotation.

I can't show you everything I've seen with 3 simple charts, but maybe it will give you some idea (also the rotational periods are very fast, typically days to a week).

 Energy went out early to mid week (when UCO was closed), but it starting to build a comeback.

 Financials have been out longer and are a bit slower in their comeback, but also a larger base, yesterday they had a negative signal late in the day and today they gap down.

Tech clearly is at the bottom of the rotation cycle and turning up or in the area for a turn up and to move in to solid rotation with by far the best looking 3C chart (after having been beaten up the most as well.)

In terms of the 10 industry groups actual price performance since QE3, it has ben the defensive sectors that led, Utilities, healthcare and staples, while the risk sectors declined.

I have no doubt this is all QE related, putting together the bigger picture though is where I'm at now. Looking at Tech alone, yes, it looks ready for rotation in to a risk on mode, but for a shakeout of shorts, not a true healthy move. So the rotation is actually a lot more complicated than it seems, but even to see it return after years of none is quite strange.